GST on automobiles needs to be reduced

“The message we are getting, after we have come here and invested money, is that we don’t want you. We won’t exit India, but we won’t scale up.” These were the words of Shekar Viswanathan, Vice-Chairman of Toyota, during an interview where he had clearly expressed his displeasure on GST rates on automobiles in India. Similar views have been expressed by Maruti Suzuk and Force Motors.

The automobile sector has been severely affected by the Covid-19 and industry experts are estimating that it will take 3-4 years to reach the sales volume which were achieved in 2018.

In microeconomics, sale of a product is driven by its demand in the market which in turn is affected by many factors, one of the most important being its price. The price is determined by the seller which constitutes cost of the product plus their profit margin. What does all of this have to do with taxes? Let’s cut to the chase now.

In addition to the price charged, the consumer also has to pay taxes while purchasing a product. Up to June 30, 2017, there were various taxes which the consumer had to pay such as excise duty, VAT, etc. From July 1, 2017, all such taxes were subsumed into GST.

Thus, demand for automobiles are affected by the price inclusive of taxes which is borne by the consumer. It would be interesting to know the impact GST has had on the sector. Has the sector has become better off or worse upon introduction of GST?

Green or red?

Before the introduction of GST, the combined taxes which the consumer had to bear on automobiles ranged between 28 per cent and 45 per cent while the rate of GST now ranges between 5 per cent and 28 per cent, with most cars and two-wheelers falling in the higher bracket of 28 per cent. Thus, it seems that the tax burden on final consumers has reduced drastically.

The real catch is that the customer has to pay compensation cess ranging from 1 per cent to 22 per cent in addition to GST. While in certain cases, even after considering the cess, the overall tax burden on the consumers was still lower than the previous regime, in certain cases (cars beyond a particular engine capacity or length), the tax burden has significantly increased.

It is important to note that compensation cess is a temporary levy which, as on date, would be levied up to 2022. Once the cess ceases to be levied, the overall tax incidence on all automobiles could reduce in comparison to the previous tax regime.

While evaluating the impact of GST, it is imperative to consider the aspect of input tax credit (ITC) as well. Earlier, a taxpayer was unable to set off credit of excise duty/service tax against VAT payments and vice versa. Further, since Central Sales Tax was not allowed as credit, it added to the cost of automobiles which had to be borne by the consumers. There were also disputes on availing credit of automobile cess which was an additional levy on automobile manufacturers.

All the aforesaid issues have been resolved in GST, whereby all taxes and cesses have been subsumed into one tax and both the Centre and States have been provided power to impose tax on both goods and services. This has resulted in seamless and lossless availment and utilisation of credit in comparison to the previous regime.

Thus, keeping in view the overall perspective, GST has had a positive impact on the automobile industry.

Why then the fuss?

In spite of the positive impact of GST, what could be the reason for the sector’s unhappiness? The grievance of the industry is on the point that GST rate in India is higher than the tax rates on automobiles in other countries. For instance, in China, automobiles are taxed at 13 per cent, in Japan at 10 per cent and in Germany at 19 per cent.

Considering the present slump in the sector, the government is discussing a possible reduction in the rate of GST on automobiles. The Union Minister of Heavy Industries and Public Enterprises, Prakash Javadekar, had recently announced that discussions are on with the Finance Minister in this regard. Therefore, an announcement could be expected shortly.

In addition, the government may also consider reducing compensation cess which is as high as 22 per cent in certain cases.

The aforesaid measures would be pivotal to ensure that India is competitive in the global market and full benefit of GST is enjoyed by the sector.

Headed the ‘green way’

The future of the sector seems to be heavily reliant on ecofriendly mode of transportation and the use of electric vehicles (EVs) is expected to increase in the coming years. Various incentives are being offered by the governments. For instance, the Tamil Nadu Electric Vehicle Policy of 2019 has offered various tax concessions including 100 per cent reimbursement of State GST paid until 2030 on supply of EVs in Tamil Nadu provided they are manufactured and registered for use in Tamil Nadu.

From the Central GST perspective, in 2019, rate of GST on EVs was reduced from 12 per cent to 5 per cent, and 18 per cent to 5 per cent on electric chargers. Further, there is no compensation cess on EVs. Thus, considering the incentives being offered, EVs seem to be a very attractive opportunity for the sector in coming years.

The automobile sector is one of the major contributors to India’s GDP. The country’s push towards ‘Aatmanirbhar Bharat’ and high rates of taxes act counter-productive to each other, especially when initiatives are being taken to promote manufacturing in India.

Even though sales have picked up in the past couple of months, the immediate future of the sector looks a little bleak. Any support would be a fitting way in which the government can say ‘we really want you’.

Prashanth is Principal Associate, and Baratwaj is Associate, Lakshmikumaran & Sridharan Attorneys, Chennai

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